What Are Stock Markets?

Home , Stock exchange, Stock market, Stock trader

LESSON 7 WHAT ARE STOCK MARKETS?

LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 107 LESSON 7 WHAT ARE STOCK MARKETS?

LESSON DESCRIPTION Primary market The lesson introduces conditions necessary Secondary market for market economies to operate. Against this background, students learn concepts Stock market and background knowledge—including primary and secondary markets, the role of in- OBJECTIVES vestment banks, and initial public offerings Students will: (IPOs)—needed to understand the stock • Identify conditions needed for a market market. The students also learn about dif- economy to operate. ferent characteristics of major stock markets in the United States and overseas. In • Describe the stock market as a special a closure activity, students match stocks case of markets more generally. with the market in which each is most • Differentiate three major world stock likely to be traded. markets and predict which market might list certain stocks. INTRODUCTION For many people, the word market may CONTENT STANDARDS be closely associated with an image of a Voluntary National Content Standards place—perhaps a local farmer’s market. For in Economics, 2nd Edition economists, however, market need not refer to a physical place. Instead, a market may • Standard 5: Voluntary exchange oc- be any organization that allows buyers and curs only when all participating parties sellers to communicate about and arrange expect to gain. This is true for trade for the exchange of goods, resources, or ser- among individuals or organizations vices. Stock markets provide a mechanism within a nation, and among individuals whereby people who want to own shares of or organizations in different nations. stock can buy them from people who want • Standard 7: A market exists when to sell shares of stock. buyers and sellers interact. This in- The three largest stock markets in the teraction determines market prices world are the New York Stock Exchange and thereby allocates scarce goods and (NYSE), the NASDAQ Stock Market, and services. the Tokyo Stock Exchange. Although these • Standard 10: Institutions evolve and markets differ from one another, especially are created to help individuals and in the kinds of stock traded and the mecha- groups accomplish their goals. Banks, nisms used for trading, all three are known labor unions, markets, corporations, as secondary markets. They are different legal systems, and not-for-proﬁ t orga- from a primary market in which a company nizations are examples of important sells shares and receives money in an ini- institutions. A different kind of insti- tial public offering (IPO). tution, clearly deﬁ ned and enforced property rights, is essential to a market CONCEPTS economy. Initial public offering (IPO) Market

108 LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY WHAT ARE STOCK MARKETS? LESSON 7

National Standards in K-12 Personal • Private property. Markets de- Finance Education, 3rd Edition pend on an individual’s ability to own and sell property. In market • Financial Responsibility and Deci- transactions, people can choose to sion Making Standard 2: Find and sell property to others and trans- evaluate fi nancial information from a fer the right of ownership with the variety of sources. sale. • Saving and Investing Standard 4: • Competition. Markets foster Describe how to buy and sell invest- competition because they allow the ments. entry of many producers striving to meet the demands of consumers. TIME REQUIRED Competition pressures these pro- 60 minutes ducers to satisfy consumer demand or be forced from the market by MATERIALS others who can. • Slide 7.1 • The profi t motive. Profi ts act • A copy of Activity 7.1 for each student as incentives for individuals and (Internet access required) fi rms. In market transactions, individuals and fi rms that satisfy consumer desires and produce ef- PROCEDURE fi ciently are rewarded with profi ts. 1. Tell the students that this lesson fo- cuses on markets in general and on the • Voluntary exchange. Because stock market in particular. Ask: What consumers have choices in a mar- is a market? What is a stock market? ket, market exchanges are voluntary. This allows consumers and 2. To begin discussing markets, ask the producers to focus on what they students to list several markets they do best and to trade with others have participated in over the last few who specialize in different areas. weeks. (Examples might include a Markets encourage trade and thus farmers’ market, a supermarket, a retail create wealth. store, a gasoline station.) 4. Introduce the lesson’s focus on stock 3. Ask the students to think about what markets by reference to the previous it would take to establish and maintain discussion. Just as there is a market markets of the sort they have men- for music downloads (iTunes), blue tioned. What sort of legal and economic jeans (department store), or books environment would be necessary? The (bookstore), there is a market for question is somewhat abstract. To help stocks. Somebody who wants to buy the students get at it, you might use stocks can buy them at a stock market. the following prompt: We couldn’t have markets unless we had 5. Explain that stock markets operate ______. Challenge the students in the same sort of legal and economic to complete the statement. Provide help environment needed by other mar- as necessary. Make a list of the neces- kets. Stock markets are places where sary conditions on the board. The list private property (shares of ownership) should include the following: is bought and sold. Stock markets are competitive markets, with thousands of

LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 109 LESSON 7 WHAT ARE STOCK MARKETS?

buyers and sellers striving to make the to brokerage houses, and brokers offer best trades they can. The profi t motive the shares for sale to individuals and prompts traders to obtain and keep institutional buyers on the secondary any gains they can make from stock market through one of the major stock trading. And stock markets depend on exchanges like the New York Stock voluntary exchange. Stock trades are Exchange (NYSE), the NASDAQ Stock not coerced; rather, buyers and sellers Market in the United States, or a stock choose to participate in their efforts to market in another country, such as the invest money wisely. London Stock Exchange or the Tokyo Stock Exchange. 6. As necessary, pause here to establish clearly what a stock is (or review Les- 9. Distribute a copy of Activity 7.1 to son 4). Explain that a stock is a share each student. Have the students read of ownership in a company. If you buy the introduction. Briefl y review the 100 shares of Acme Electronics, you be- overview of market mechanics, using come a part-owner (100 shares’ worth) Slide 7.1 as needed. of Acme Electronics. And why would 10. Have the students read the descrip- people want to buy stock in a given tions of the three major stock markets. company? Identify two main reasons: Call on students to identify the distinc- (a.) they expect to share in a company’s tive characteristics of each of the three profi ts (called dividends) paid out to markets. Record their responses on the shareholders; (b.) they believe the price board. Sample responses: of the company’s stock will rise above the price they paid for it—in other New York NASDAQ Tokyo Stock words, that their asset will grow in Stock Stock Market Exchange value. Exchange (NYSE) 7. Ask the students if they have ever seen Founded in Founded in Founded in a stock store at the mall. If not at the 1792. 1971. 1878. mall, where can you go to buy stocks? Explain that almost all stock sales and About 3,500 About 2,800 About 2,300 companies companies companies purchases—often called stock trades— listed. listed. listed. are handled by a specialized salesper- son called a broker. In addition, almost Home of large Considered the Home of the and well- home of tech Nikkei 226 all stocks are sold by these brokers in established stocks. index. secondary markets. companies. No physical Companies 8. To distinguish between primary and Listed location; separated into secondary markets, Display Slide 7.1. companies trades done three categories: Explain that companies such as Com- must have via computer large, mid- pany X often seek additional resources at least network. sized, and $100,000,000 growth/ Largest market to expand or run their business. One in outstanding startup. in terms of way to generate these resources is to stock and trade stocks traded. 104 members. offer all, or a portion, of the company an average of for sale to the public-at-large (“take a at least 100,000 No fi xed company public”). This is done in the shares per day. number of members. primary market through an initial 1,336 member public offering (IPO) in which stocks seats. are sold to large investment banks. Investment banks then sell the shares

110 LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY WHAT ARE STOCK MARKETS? LESSON 7

11. Have the students complete the Place correct). If a student has a calculator, it the Stock activity. Answers: might be made by Casio or Sony. Both of these fi rms are traded on the Tokyo Market Stocks Stock Exchange. Once the students New York Stock Con Ed DuPont McDon- have made their guesses, ask them to Exchange ald’s use the internet in class to determine (NYSE) which ones are correct and which are NASDAQ Stock Atari Intel Telecom incorrect (or you might assign this as Market Austria homework or a library project). Tokyo Stock Toyota POSCO YTL Cor- Exchange poration ASSESSMENT Multiple-Choice Questions CLOSURE 12. Briefl y review major points of the 1. All of the following conditions are es- lesson. The students have studied sential to a market economy except concepts and background information a. the private property of individuals about stock markets, including the is well defi ned and protected. general legal and economic conditions b. the government controls decisions that support markets generally. They about production and consumption. have learned that the stock market is c. competition puts pressure on busi- a specialized market in which shares of nesses to satisfy consumer desires. stock are bought and sold. Also review d. profi ts are an incentive for produc- the three stock markets discussed in ers to respond to consumer choices. this lesson. 2. In the case of stock trades, the second- 13. Organize the class into groups of four ary market consists of students each. Working in their groups, the students should look at the cloth- a. the trading of a company’s stock in ing and shoes they are wearing, their a stock market. backpacks or book bags, and any other b. the purchase of a company’s stock items they may have brought with by an investment bank. them to class. Can they identify the c. the fi rst offering of a company’s companies that made these items? If stock to the public. so, have them list several of the compa- d. all trading that occurs in the initial nies on a piece of paper. Then ask the public offering of the stock. students to make some well-informed 3. All of the following are true of the New guesses about which stock markets the York Stock Exchange except that companies that made their products might be listed on. For example, if a a. it has a fi xed number of member- student has an AT&T cell phone, she ships called “seats.” might guess that AT&T is a high-tech b. it operates a physical trading fl oor fi rm listed on the NASDAQ (although rather than being all electronic. this guess would be wrong). If a stu- c. it contains a smaller proportion of dent is wearing Nike shoes, he might young technology companies than guess that the stock of this company, the NASDAQ Stock Market. given the company’s size, would be d. it is the largest stock market in traded on the NYSE (and he would be terms of trade volume.

LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 111 LESSON 7 WHAT ARE STOCK MARKETS?

4. Which of these is an accurate state- often referred to as an initial public ment about the NASDAQ and NYSE? offering [IPO]) or “going public.” In the secondary market, shares of stock are a. The NASDAQ Stock Market is a bought and sold by individuals and secondary market; the NYSE is a brokers in a stock market.) primary market. b. Membership on the NYSE is limited; the NASDAQ has an open membership. c. Trading on both the NASDAQ Stock Market and the NYSE is limited to one physical location. d. The NASDAQ Stock Market was founded before the NYSE.

Constructed-Response Items 1. Identify and briefl y explain four conditions that enable market economies to operate. (Private property. Markets depend on an individual’s ability to own and sell property. In market transactions, people can choose to sell property to others and transfer the right of ownership with the sale. Competition. Markets foster competition because they allow the entry of many producers striving to meet the demands of consumers. Competition pressures these producers to satisfy consumer demand or be forced from the market by other producers who can. The profi t motive. Profi ts act as incentives for individuals and fi rms. Individuals and fi rms that satisfy consumer desires and produce effi ciently are rewarded with profi ts. Voluntary exchange. Because consumers have choices in a market, all exchanges are voluntary. This allows consumers and producers to focus on what they do best and to trade surplus production or wealth. Markets encourage trade and thus create wealth.) 2. Describe the difference between primary and secondary stock markets. (In the primary market, the fi rm sells stock to an investment bank. This is

112 LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY WHAT ARE STOCK MARKETS? LESSON 7

Gen i Connection Among the print lessons in this book, Lesson 7 (“What Are Stock Markets?”) and Lesson 14 (“How Are Stock Prices Determined?”) have close ties to Mission 12 of the Gen i Revolution game, “Show Jasmine what determines stock prices.” In this mission, Jasmine needs help in understanding the stock market so that she can help her clients make trades. The 4-1-1 tutorial guides students to equilibrium at the intersection of demand and supply curves, and it shows them how events could change equilibrium stock prices. As students complete this mission, they fi nd themselves on the fl oor of a fi ctional stock exchange as they are asked to react to the news of the day and help Jasmine predict changes in stock prices.

Gen i Reﬂ ection Jasmine learned in Gen i Revolution Mission 12 that she would have to react quickly to incoming news in order to be a successful stock trader. Some jobs are like that, requiring constant attention and fast action. Other jobs, such as ac- counting, call for patience and discipline but not as much fast action. Thinking about your own skills and abilities, which type of job would you ﬁ nd more satisfy- ing? Explain your answer.

LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 113 LESSON 7 WHAT ARE STOCK MARKETS?

ACTIVITY 7.1 MEET THE STOCK MARKETS

The stock market is an institution enabling people who want to buy shares of stock to buy them from others who want to sell shares of stock. This market matches buyers and sellers and provides a means for reaching mutual agreement on price. That is, the price of a share of stock is set at the moment when a buyer and seller agree to make a trade, and not before. The stock market is more than a physical location (and need not be a physical location at all); it is a set of arrangements, advertisements, online transactions, computer listings and personal relationships that make it possible for stocks to be traded. Although often referred to as if it were a single entity, “the stock market” is actually a number of different markets. The three largest stock markets in the world are the New York Stock Exchange (NYSE), NASDAQ Stock Market, and the Tokyo Stock Exchange in Japan. The New York Stock Exchange (NYSE) The oldest stock exchange in the United States, the NYSE was founded in 1792 when 24 brokers agreed to form the exchange. Today about 3,500 public companies are traded on the NYSE, and these companies have a combined value of about $13.5 trillion. Generally, small corporations’ stocks are not listed on the NYSE. In order to be listed on the NYSE, the company must have outstanding share value (the value of all the shares of stock not owned by the company itself) of at least $100 million and must trade at a volume of at least 100,000 shares per day. The NYSE operates a trading fl oor in New York City. Members of the NYSE—1,336 brokers and specialists—carry out all trades. Members are said to have a “seat” on the NYSE, although they never actually sit down, and such seats have sold for as much $4 million in recent years. Investors purchase stocks by placing orders with brokers from around the United States and the world. These brokers then place fl oor orders at the NYSE, and those orders are fi lled by the members. In recent years, nearly 80 percent of the order volume has been delivered electronically. NASDAQ Stock Market The NASDAQ Stock Market began trading in 1971, and in 1999 it surpassed the NYSE as the largest stock market (as measured by volume of stock trades) in the United States. The NASDAQ Stock Market is unique because it does not reside any single location. Rather, trades are executed using the NASDAQ’s sophisticated computer and telecommunication network. As the world’s fi rst electronic stock market, it is made up of the NASDAQ National Market and the NASDAQ Small Cap Market. The NASDAQ allows multiple market par- ticipants to trade through its electronic communications network structure, thus increasing competition. The NASDAQ Stock Market currently lists the stocks of more than 2,800 companies, with a combined value of $3.2 trillion. The NASDAQ is widely known as the home of many of the world’s largest technology-based companies, particularly those involved with computers, software, and the internet. More shares are traded on the NASDAQ than any other stock market in the world, largely because membership is not limited to a fi xed number of seats. Any fi rm or individual that meets certain requirements may join the NASDAQ. This policy allows more than 300 “market makers” (also known as dealers, to their customers) to operate like retail store owners, buying inventory of stock shares to sell to their customers.

114 LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY WHAT ARE STOCK MARKETS? LESSON 7

Stock Indexes Several important stock indexes are tracked on U.S. markets. A stock index is a composite of the value of a number of stocks used to measure the ups and downs of the overall market. The most famous stock index is the Dow Jones Industrial Average (DJIA), or “the Dow,” which consists of 30 of the biggest companies in the United States including fi rms such as Walt Disney, Coca Cola, and Walmart. Today, the Dow is the most widely followed measure- ment of the stock market. A second important index of stocks is the Standard and Poor’s (S&P) 500. This index uses the stock prices of 500 companies including Boeing, Microsoft, and 3M. Tokyo Stock Exchange The Tokyo Stock Exchange (TSE) was established in 1878 in Tokyo, Japan. It has almost 2,300 listed companies with a combined value of $3.8 trillion, making it the third-largest stock exchange in the world. Stocks listed on the TSE are separated into the First Section for large companies, the Second Section for mid-sized companies, and the Mothers Section for high-growth startup companies. The best known TSE stock index is the Nikkei 225. Formerly called the Nikkei Dow Jones Stock Average, it consists of 225 of the biggest companies in Japan including fi rms such as Mitsubishi, Sony, and Sharp. Many major Japanese companies are also listed on the NYSE via American Depositary Receipts (ADR), which represent shares of foreign-based corporations so American investors can buy shares in the United States. Place the Stock Listed below are brief descriptions of nine stocks that are listed on one of the three major world stock markets described above. After reading these descriptions, and using what you know about each market, place each stock in the appropriate place on the grid that follows. Pay close attention to the information provided. For example, newer high-tech companies are more likely to be listed on the NASDAQ Stock Market (which opened in 1971). 1. POSCO A multinational steel-making company headquartered in Pohang, South Korea. It had an output of 35.4 million metric tons of crude steel in 2010, making it the world’s third- largest steelmaker. POSCO currently operates two integrated steel mills in South Ko- rea, in Pohang and Gwangyang. In addition, POSCO operates a joint venture with U.S. Steel, USS-POSCO, which is located in Pittsburg, California. 2. ATARI Atari’s principal activities are to develop, publish, and distribute interactive entertainment software for leisure entertainment, gaming enthusiasts, and children’s markets for a variety of platforms. This stock was fi rst listed in 1998, and shares traded often average more than 100,000 per day. 3. DUPONT Founded in 1802, this fi rm offers a wide range of innovative products and services for markets including agriculture, nutrition, electronics, communications, safety and protec- tion, home and construction, transportation, and apparel. Operating in approximately 90 countries, this company’s stock is part of both the Dow Jones and the S&P 500 stock indexes.

LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 115 LESSON 7 WHAT ARE STOCK MARKETS?

4. INTEL Intel’s principal activities are to design, develop, manufacture, and market computers, networking, and communication products. Listed since 1998, this stock regularly averages over 10 million shares traded per day. 5. MCDONALD’s McDonald’s Corporation operates in the food-service industry, franchising quick-service restaurant businesses under the McDonald’s brand. This stock was fi rst listed in 1966; it is part of the Dow Jones Industrial Average. Shares traded often average near 10 million per day. 6. TOYOTA Toyota Motor Corporation is one of the world’s largest automobile manufacturers. Founded in 1937, Toyota manufactures, sells, leases, and repairs passenger cars, trucks, buses, and their related parts worldwide. Shares traded often average near 10 million per day. 7. TELEKOM AUSTRIA This group’s principal activities are to provide fi xed-line and wireless communication services in Austria and throughout Europe. Listed since 1998, this stock averages 1,000 shares traded per day. 8. CONSOLIDATED EDISON (CONED) Con Edison of New York provides electric power in all of New York City (except Queens) and most of Westchester County. This stock was fi rst listed in 1824. Shares traded per day often exceed one million. 9. YTL CORPORATION YTL Corporation is Malaysia’s leading integrated infrastructure conglomerate. The company is involved with utilities, high-speed rail projects, and construction. The stock was fi rst listed in 1985; shares traded per day average about 10,000.

Match the Stocks to the Markets

Market Stocks

New York Stock Exchange (NYSE) NASDAQ Stock Market Tokyo Stock Exchange

116 LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY WHAT ARE STOCK MARKETS? LESSON 7

SLIDE 7.1

LESSON 7 - WHAT ARE STOCK MARKETS?

Overview of the Market for Stocks

Company X needs Offers stock for sale for the resources to first time in an Initial Public expand business Offering (IPO) purchased by investment bankers PRIMARY MARKET PRIMARY

Company X stock is offered for sale by brokers on a major stock market

Individual investor purchases Company X stock online or Stock Market

with a phone call (NYSE) Exchange NASDAQ NASDAQ SECONDARY MARKET New York Stock Stock York New

LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 117 LESSON 7 WHAT ARE STOCK MARKETS?